Where State employees voluntarily executed agreements for participation
in a deferred compensation program whereby amounts were deducted from
their salaries for use in funding annuity or insurance contracts and where
a question arose as to whether contributions were due under section 218 of
the Social Security Act with regard to the amounts deducted, held, for
purposes of the Act, the amounts deducted constituted wages paid to such
employees at the time of the deduction.

A question has been raised with respect to the status, for purposes of
the Social Security Act, of amounts used to fund a deferred compensation
plan which is available to all employees of the State of Y.

The Legislature of the State of Y enacted a bill which authorized the
State or any political subdivision thereof to contract with any employee
of such State or political subdivision to defer all or a portion of the
employee's compensation and, with the consent of the employee, to secure
for the employee a life insurance annuity or mutual fund contract for the
purpose of funding a deferred compensation program for the employee. The
bill also provides that payroll deductions shall be made in each instance
and that any amounts deferred under the program shall not be subject to
taxation until distribution is actually made to the employee.

An employee eligible to participate in the plan in its initial year must
execute an agreement to defer compensation not yet earned prior to or
within a reasonable time after the plan becomes effective. All other
agreements to defer compensation must be made prior to the beginning of
the calendar year in which the compensation will be earned. The amount of
compensation to be deferred may be changed by any participant but such
change must be made prior to the beginning of the calendar year in which
it is to become effective.

The statutory scheme contemplated that the State would create a special
book account to which amounts deferred under the plan would be credited.
The account is to be increased or decreased by gains or losses realized on
investments made with the deferred amounts. The State is authorized to
purchase fixed or variable life insurance or annuity contracts or mutual
fund contracts. In the agreement with the employee, the State is styled as
"the owner, premium payor and beneficiary" of each such investment
contract.

All investments purchased under the program are to be general, upledged
and unrestricted assets of the State. Employees participating in the plan,
or their beneficiaries, would have no vested, secured, or preferred
interest in the fund, but would have only a contractual right to receive
benefits provided for in the agreement.

Benefits under the plan will be paid to an employee upon his retirement
or termination of employment with the State, or, in the case of death of
an employee, to his beneficiary.

While an employee's agreement is in effect, all investments in his
account will be reflected at cost. Prior to the day the first benefit
payment is made to the employee or his beneficiary, adjustment will be
made for gains and losses on investments. The State, at its discretion,
may pay the value of the account (1) in a lump-sum payment, (2) in
installment payments over a period of 60 to 240 months, or (3) in payments
for the lifetime of the employee unless the employee should not live to
receive 120 monthly payments, in which event the balance would be paid to
the employee's beneficiary.

The State, in its discretion, may approve an application by a
participating employee for an emergency withdrawal of funds, but only in
the event of a serious emergency which is beyond the employee's control
and which would cause that employee great hardship if the emergency
withdrawal were not permitted. Any emergency withdrawal which is approved
will be limited to the amount necessary to meet the emergency
situation.

Deductions made from wages to fund the plan do not affect a reduction of
any retirement, pension or similar benefit otherwise provided by law.

The specific issues presented for resolution are (1) whether the amounts
deferred under the deferred compensation plan constitute wages for
purposes of determining liability for contributions due under the Social
Security Act and (2), if so, when such wages are considered paid to the
employee.

In most instances, the question of whether compensation constitutes wages
subject to social security taxes depends upon whether it constitutes
remuneration for employment under that portion of the Internal Revenue
Code known as the Federal Insurance Contributions Act. See section 3121(a)
of the Code. That statute is administered by the Internal Revenue Service,
which has primary responsibility for the proper interpretation of its
provisions. Under section 3121(b)(7) of the Code, however, the Federal
Insurance Contributions Act is inapplicable to service performed by
individuals as employees of State or local governments. Thus, the
provisions of that statute are not controlling in determining whether the
compensation of State and local employees constitute wages.

Instead, the status of the compensation being discussed herein depends
upon whether it constitutes wages and when it is considered paid within
the meaning of the Social Security Act. That Act is administered by the
Social Security Administration and the proper construction of its
provisions are within the jurisdiction of that agency.

Section 209 of the Social Security Act, 42 U.S.C. 409, defines wages as
remuneration for employment with specified exceptions which are not
relevant herein. By virtue of section 210(a)(7)(A) of the Act, 42 U.S.C.
410(a)(7)(A), unlike its concomitant in the Federal Insurance
Contributions Act, employment includes services of State and local
employees which are included under an agreement for social security
coverage between a State and the Secretary of Health, Education, and
Welfare, as provided for in section 218 of the Act, 42 U.S.C. 418.

The State of Y has entered into such a coverage agreement and the
services of employees participating in the deferred compensation plan are
included under that agreement. Consequently, compensation paid for those
services is remuneration for employment and thus constitutes wages within
the meaning of the Social Security Act.

Under 218(e)(1)(A) of the Social Security Act, 42 U.S.C. 418(e)(1)(A), a
State is required to pay certain contributions on wages included in its
coverage agreement, at such times as the Secretary of Health, Education,
and Welfare may be regulations prescribe. Social Security Administration
Regulations No. 4, section 404.1222(a), 20 C.F.R. 404.1222(a), insofar as
applicable herein, provides that the State's liability for such
contributions attaches at the time that the wages are "actually or
constructively paid" to the employee. This raises the question of whether
the so-called deferred compensation herein is "paid" at the time of
deferral or at the time of actual distribution to the employee.

The answer to that question is not affected by State legislation which
purports to preclude taxation of any sum deferred under its plan until
distribution is actually made to the employee. Since liability for payment
of contributions once a State has properly entered into an agreement under
section 218, is a matter of Federal law, the operative provisions of such
law may not be nullified or modified by State law.

Rather the question of when liability arises for contributions due under
section 218 of the Act requires an examination of the facts of each case
to determine when wages are considered to be paid within the meaning of
section 404.1222(a) of Social Security Administration Regulations No. 4,
20 C.F.R. 404.1222(a). The determinative fact in this case is that
employees participating in the State of Y's deferred compensation plan
have voluntarily chosen to have the employer deduct certain amounts from
their salaries for payment into investment accounts.

For purposes of social security coverage, those employees are in the same
position that they would have been in if they had actually received the
amounts deducted and personally paid them into the investment accounts. In
other words, the payroll deductions in this case assist the employees to
"spend" their own funds; the employer is a conduit for that purpose. Such
a situation clearly comes within the purview of Social Security
Administration Regulations No. 4, section 404.1026(c); 20 C.F.R.
404.1026(c). That section provides that amounts deducted from wages of an
employee by an employer constitute wages paid to the employee at the time
of the deduction.

This accords with decisions of the United States Supreme Court which hold
that, for purposes of determining when liability for employment taxes
attaches, the time at which an employee's earned wages were considered to
be paid was not affected by a contractual arrangement for diversion of
such wages to another party. For example Lucas v. Earl, 281 U.S. 111
(1930), points out:

There is no doubt that the statute could tax salaries to those who earned
them and provide that the tax could not be escaped by anticipatory
arrangements and contracts however skillfully devised to prevent the
salary when paid from vesting even for a second in the man who earned
it.

Also, see United States v. Basye et. al., 410 U.S. 441 (1973).

SSR 64-59, Cumulative Bulletin 1964,
p. 48, is an appropriate administrative precedent for the present case. In
that ruling, as in this one, certain State employees voluntarily agreed to
have amounts deducted from their salaries for use in financing later
payments to them of annuities. It was determined that the amounts deducted
were then creditable as wages paid to the employees for purposes of the
Social Security Act.

It is recognized that, in SSR 73-30,
Cumulative Bulletin 1973, p. 48, where certain amounts were paid to a
former employee during his post-retirement years under an agreement which
treated those amounts as deferments of portions of previously earned
salary, it was determined that such amounts were wages for the years in
which they were physically paid out to the employee. On the basis of the
facts stated in that ruling, however, it appears only that such payments
were a requirement of the employment contract itself; there is no evidence
that, like the employee here, the employee there voluntarily executed a
deferred compensation agreement. The employee involved in that case had no
right to immediate possession of his earned wages and could receive them
only at a future date. Hence, that ruling is not determinative in the
present situation.

While not previously so stated, the payments in
SSR 73-30 were also not excluded as
wages under section 209(m) of the Social Security Act. That specific wage
exclusion, in addition to other criteria, generally requires that payments
be made under a plan established by the employer which makes provision for
his employees generally or a class or classes of his employees. The
payments which were the subject of SSR
73-30 were not made under such a plan.

In summary, the question of when wages are considered to be paid for
purposes of the Social Security Act must be determined on the basis of the
facts of each case. Thus, except for wages withheld by mandate of Federal
or State law, if an employee has no option or right to receive wages he
earned until a certain future date, the wages may not be considered paid
before such date. On the other hand, where, as in the present case, an
employee has a right to immediate possession of his earned wages but
agrees to have certain amounts deducted from his pay for use in financing
an annuity, the deductions made pursuant to that agreement constitute the
employee's exercise of his right to spend his wages, and the amounts
deducted must therefore be considered as wages which were paid to the
employee at the time of deduction.

Accordingly, for purposes of determining liability for contributions due
under section 218 of the Social Security Act, where deductions are made
from the salaries of employees of the State of Y under agreements which
the employees have voluntarily executed pursuant to the State's deferred
compensation plan, the amounts deducted may be credited as wages paid to
the employees at the time of the deductions.

Follow:

External Link Disclaimer

You are exiting the Social Security Administration's website.

SSA cannot attest to the accuracy of information provided by such websites. If we provide a link to such a website, this does not constitute an endorsement by SSA or any of its employees of the information or products presented on the non-SSA website.

Also, such websites are not within our control and may not follow the same privacy, security or accessibility policies. Once you visit such a website you are subject to the policies of that site.